Company car tax usually shows up on your payslip indirectly, as a larger income tax deduction caused by a reduced tax code, rather than as a line labelled “company car.” Some employers handle it differently by adding the car’s taxable value straight onto your gross pay each month, a method called payrolling. Either way, the tax lands in the same place: your take-home pay falls to account for having a car available for private use. From April 2027, the payrolled method becomes the default for most benefits, so the hidden version is on its way out.1GOV.UK. Mandatory Payrolling of Benefits in Kind and Expenses – Interim Guidance
The Tax Code Method: Why Your Deduction Went Up
For most employees today, company car tax has no dedicated line on the payslip. HMRC collects it by lowering your tax-free personal allowance, which pulls more of your salary into tax across the year. Your employer reports the car’s benefit value, HMRC issues a new tax code with a lower number, and your payroll software applies it from the next pay run.2GOV.UK. Tax on Company Benefits – Tax on Company Cars
The tax code number roughly represents how much you can earn tax-free, multiplied by ten. Say your usual code is 1257L, matching the £12,570 personal allowance. If your company car creates a taxable benefit of £5,000, HMRC might drop your code to around 757L. Nothing on the payslip says “company car.” You just notice more tax being deducted from the same gross salary.
K Codes: When the Benefit Wipes Out Your Allowance
If the car’s value plus any other benefits exceeds your entire personal allowance, your tax code flips to a format starting with the letter K. This is more common than people expect, particularly when a high-value car is combined with private medical insurance or other perks. A K code means HMRC treats the excess as extra taxable pay rather than simply cutting your allowance to zero.3GOV.UK. Tax Codes – If You Have a K in Your Tax Code
The payroll software multiplies the number after the K by ten and adds that amount to your taxable income before working out the deduction.4GOV.UK. Understanding Your Employees Tax Codes – Tax Codes With the Letter K You don’t receive any extra cash; the “deemed pay” simply pulls the right tax through. If a K code appears unexpectedly, check the car details HMRC holds for you, because an error here inflates every pay packet until it’s corrected.
Payrolling: The Visible Line on Your Payslip
Some employers payroll the car benefit instead of leaning on the tax code. The employer divides the car’s annual taxable value by the number of pay periods and adds that slice to your gross pay each month. Your payslip shows a higher gross figure than your actual salary, with a correspondingly larger tax deduction. The cash reaching your account already reflects the tax collected on the car in real time.5GOV.UK. Payrolling – Tax Employees Benefits and Expenses Through Your Payroll
This method is the clearer of the two from your side of the desk. You can see exactly how much the car costs you in tax each month rather than trying to reverse-engineer the impact from a modified code. Employers who go this route register with HMRC before the start of the tax year and don’t need to file a P11D for the payrolled benefits afterwards.5GOV.UK. Payrolling – Tax Employees Benefits and Expenses Through Your Payroll
From April 2027, most benefits in kind, including company cars, must be reported and taxed through payroll in real time. Employers will no longer have the option of filing P11D forms for these benefits.1GOV.UK. Mandatory Payrolling of Benefits in Kind and Expenses – Interim Guidance Company car tax will then appear on every payslip as a visible addition to gross pay with its own tax deduction, rather than sitting inside a tax code adjustment.
How the Taxable Amount Is Worked Out
Three figures drive the number you’re seeing: the car’s list price, its CO2-based benefit-in-kind (BIK) percentage, and your income tax band. Multiply them together and you get the tax collected across a year.
The List Price
The starting point is what HMRC calls the “price of the car,” often known informally as the P11D value. This is the manufacturer’s published retail list price on the day before the car was first registered, including standard accessories, VAT, and delivery charges. It excludes the first registration fee and vehicle excise duty.6GOV.UK. How to Work Out the Benefit of a Company Car (480 Chapter 12) Optional extras fitted before the car was first made available to you are added on top, with fitting charges and VAT included. This figure stays fixed for the life of the car, regardless of depreciation or what your employer actually paid.
The BIK Percentage
Each car has a BIK percentage set by its CO2 emissions. Lower-emission vehicles attract much lower percentages. For the 2025/26 tax year, a fully electric car sits at 3%, rising to 4% for 2026/27. Plug-in hybrids emitting between 1 and 50 g/km fall between 3% and 15% in 2025/26 (4% to 16% in 2026/27) depending on how far they can travel on electric power alone.7GOV.UK. Work Out the Appropriate Percentage for Company Car Benefits (480 Appendix 2) Petrol and higher-emission cars climb steeply, up to 37% for the most polluting vehicles.
Your Tax Rate
List price times BIK percentage gives you the annual taxable benefit. Your income tax band then decides the cash impact. A basic-rate taxpayer pays 20% of that benefit each year, a higher-rate taxpayer 40%, and an additional-rate taxpayer 45%.8GOV.UK. Income Tax Rates and Personal Allowances Same car, very different bills.
A Worked Example
Take an electric company car with a list price of £40,000. For 2025/26 the BIK rate for a zero-emission vehicle is 3%. The annual taxable benefit is £40,000 × 3% = £1,200. A basic-rate taxpayer’s annual tax is £1,200 × 20% = £240, or about £20 a month.
If your employer payrolls the benefit, you’d see roughly £100 added to your monthly gross pay (£1,200 ÷ 12) and about £20 more in tax. If instead HMRC adjusts your tax code, your personal allowance drops by £1,200 and the extra tax spreads across every pay packet. Swap that electric car for a petrol model emitting 130 g/km with a BIK rate of 31%, and the same £40,000 list price produces a taxable benefit of £12,400 and annual tax of £2,480 at the basic rate. More than ten times the electric figure.
The Diesel Supplement
Diesel cars that haven’t been certified to the Real Driving Emissions 2 (RDE2) standard attract a 4% surcharge on top of their BIK percentage. Diesel vehicles that meet RDE2 are exempt.9GOV.UK. Cars Appropriate Percentage – Increasing the Diesel Supplement The supplement is capped so the total BIK percentage never exceeds 37%. If your diesel’s CO2 rate would normally give a 28% BIK charge but it fails RDE2, it becomes 32%. That four-point jump can add hundreds of pounds a year, so check your car’s RDE2 status with your fleet manager if the tax looks higher than expected.
Fuel Benefit: A Separate Charge Hidden in the Same Deduction
If your employer also pays for fuel used privately, a separate fuel benefit charge sits on top of the car benefit. It’s calculated by multiplying a fixed government multiplier by the same BIK percentage used for the car. For 2026/27, the multiplier is £29,200. On a car with a 25% BIK rate, the taxable fuel benefit is £29,200 × 25% = £7,300. A basic-rate taxpayer would owe an extra £1,460 a year just for the fuel.
The fuel benefit is all-or-nothing. If your employer pays for even a small amount of private fuel, you’re taxed on the full charge. The only way to avoid it is to reimburse your employer for every drop of fuel used privately; partial reimbursement does nothing. If your payslip deduction looks larger than the car alone would explain and your employer covers your petrol, the fuel benefit is usually why.
When Your Car Changes Partway Through the Year
Company car tax is proportional. If you hand back a car mid-year, or receive a new one, HMRC reduces the benefit value to reflect only the period the car was available to you.2GOV.UK. Tax on Company Benefits – Tax on Company Cars You can report the change yourself through HMRC’s online service so your tax code updates promptly.10GOV.UK. Check or Update Your Company Car Tax Waiting for your employer’s year-end reporting to catch up can mean months of overpaid tax before it’s corrected.
The same applies to swaps between cars with different emissions or list prices. Each car’s benefit is worked out separately for the days it was available. If you’ve left a company or given a car back and your tax code isn’t adjusted quickly, any overpayment is usually refunded through a revised code or a year-end reconciliation.
Checking Your Payslip Is Right
Start with HMRC’s online personal tax account. It shows which company car HMRC thinks you have and the taxable value attached to it, and you can correct the details directly.10GOV.UK. Check or Update Your Company Car Tax Common errors include the wrong CO2 figure, a car that was returned months ago still showing as active, and accessories being counted twice. Any of these inflates the benefit and pushes up every month’s deduction.
If your employer payrolls the benefit, the amount added to your gross pay each month should equal the annual taxable value divided by the number of pay periods. You can check it yourself: list price × BIK percentage = annual taxable benefit; divide by 12 for monthly pay. If the payslip figure doesn’t match, raise it with payroll before the error compounds. If your employer uses the tax code method, compare your current code with what it would be without the car (usually 1257L for a standard allowance); the gap between them, multiplied by ten, should roughly match the annual benefit HMRC is collecting on.